PCBL: Guiding for good growth over next few years

PCBL’s carbon black volumes benefited from the decelerating impact of destocking

Though PCBL witnessed 6% YoY growth in its carbon black volumes in Q4FY23, destocking remained a pain. For FY24, the company expects carbon black volume growth of ~15% driven by restocking and ramp-up at the Chennai facility, and 25% volume growth in specialty. PCBL is excited about exports, particularly to the US and Europe where the demand-supply scenario is becoming favourable, with restrictions on Russia supplies giving the company an advantage. PCBL has now guided for carbon black volume growth of 12-13% p.a. (vs historical high single-digit growth) over next five years, which is significantly positive. Gross profit per kg in FY24 should be stable despite one-off gains in FY23, which the company is confident of balancing in FY24 through internal efficiencies. Company expects spreads to start improving again, FY25 onward. It is very close to completing product development in conductive grade, and should benefit from its use in EVs. We have cut our EPS estimates by 4-5% over FY24E-FY25E as we remain conservative on domestic spreads. However, we have increased FY25E P/E multiple to 12x (from 10x) as we believe the market is becoming favourable.

Carbon black volumes rose 6% YoY / 17.5% QoQ to 119kte. PCBL’s carbon black volumes benefited from the decelerating impact of destocking, but falling prices (due to drop in input CBFS prices, which is linked to crude oil) made carbon black volumes grow slower than the tyre industry in FY23. PCBL has commissioned the first phase of its Chennai facility and the remaining capacity is likely to commence in the next three months. It anticipates 40% utilisation of the Chennai facility in FY24. At the Mundra facility, the company will add 20ktpa capacity in specialty segment in FY24. Management has guided that PCBL can grow volumes by 12-13% p.a. over next five years vs high single-digit growth historically. Demand-supply scenario in the two large markets of US and Europe is becoming favourable. PCBL also anticipates capacity addition to keep pace with growing demand. Specialty segment is likely to benefit from new product additions (including conductive materials), and market share gains in India and overseas.

India volumes grew 3.9% YoY to 80kte and export volumes 10.6% YoY to 39kte in Q4FY23. Specialty volumes rose 23% YoY to 11.5kte, and now account for 9.6% of total volumes. Outlook on volume growth across categories remains unchanged. Demand prospects in export markets too are decent with 75% of volumes coming from South-East Asia where PCBL has a good foothold; Europe is 20% of exports and the company expects regulatory restrictions on Russia to act in its favour. Supplies from India are likely to increase, but the company does not expect much disruption.

Gross profit per kg rose 4.8% YoY to Rs29.3 (down 6.9% QoQ). Gross profit was lower QoQ due to high-cost inventory. Company believes it can retain FY23 spreads in FY24 despite the opportunistic sales in FY23. It expects the Chennai plant to have better efficiency and aid margin expansion in FY25. Structurally, the company believes it will continue to improve spreads on the basis of underlying factors.

EBITDA rose 37% YoY to Rs1.8bn on low base. Revenues grew 12.7% YoY to Rs13.7bn driven by higher realisations, which rose 5.6% YoY (fell 14.6% QoQ) to Rs112/kg. Gross profit was up 11.1% YoY at Rs3.5bn on slightly better spreads. Employee cost rose 12% YoY and other expenses were down 14% YoY. Finance cost increased 2.7x to Rs186mn. Net profit rose 16% YoY to Rs1bn, and was restricted by a higher tax rate at 31% (vs 19.1% in Q4FY22).

Significant improvement in working capital days. In FY23, PCBL’s working capital days fell to <50 days from 65 in FY22, which significantly helped release working capital. Company expects FY24 capex at only Rs2.5bn aiding debt reduction, and capacity expansions through internal accruals thereafter.

Earnings call highlights.

* The US market is seeing demand-supply mismatch. Considering that no new capacity is being added there, the gap is expected to widen.

* Europe is expected to pass a regulation restricting Russian carbon black supplies into Europe by Jun’24. Also, Europe is not adding any major capacity, which makes it too an exciting market for PCBL

* India tyre demand grew 10% in FY23, but carbon black volumes were weak due to destocking; the situation should recover as crude prices stabilise. Tyre demand in India is expected to grow in high single-digits.

* Specialty carbon black is expected to grow at 25% p.a. in next few years as the company add more products. PCBL is also close to completing product development in conductive grade carbon black, compounds using nanotechnology, etc.

* China CBO prices have not dropped in line with coal tar. It is still at a premium of US$250-300 vs CBFS.

* Company expects 40-50% utilisation of its 147ktpa Chennai facility in FY24. It expects to advance a planned 50kpta expansion of the facility. It also has space in Mundra to add more capacity if required.

* Mundra will add 20ktpa capacity (specialty) in FY24 and likely add another line of 20ktpa in FY25.

* Carbon black by weight contributes 24% to tyre, and silica 2-4%. Company does expect this mix to change in future.